Purpose of the Bill

The Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 (the Bill) seeks to implement further reductions in personal income tax rates announced in the 2019–20 Budget. These proposed changes are on top of tax cuts already legislated through the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 (the PITP Act). The changes in this Bill will be implemented over three stages, commencing in 2018–19, 2022–23 and 2024–25, timing which is consistent with the already legislated tax cuts.

Structure of the Bill

The Bill consists of two schedules:

• Schedule 1 amends the Income Tax Assessment Act 1997 (ITAA97) to amend the existing low and middle income tax offset (LMITO) and the existing low-income tax offset (LITO). and
• Schedule 2 amends the Income Tax Rates Act 1986 (Rates Act) to enact changes to personal income tax thresholds for resident and non-resident tax-payers.

Committee consideration

At the time of writing, the Bill had not been considered by any Parliamentary Committees.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[1]

Background

Australia has a progressive personal income tax system where the rate of tax paid on each dollar increases above certain taxable income thresholds. The Rates Act sets the rates of tax paid on income within these taxable income thresholds.

An individual’s tax liability can generally be reduced in two ways, through deductions or tax offsets. Deductions reduce taxable income to which tax rates are applied to determine a tax liability, whilst offsets are applied after the tax liability is calculated.

The next stage of the personal income tax plan (PITP) is being delivered through a combination of tax offsets for low and middle income earners and changes in taxable income thresholds. The changes are implemented across three stages commencing in the 2018–19 income year, the
2022–23 income year and the 2024–25 income year.

Stage one: commencing in the 2018–19 income year

The PITP Act introduced the low and middle income tax offset (LMITO). The LMITO is a
non-refundable tax offset for resident taxpayers with low and middle incomes (up to $125,333). The LMITO applies in addition to the existing low income tax offset (LITO). Under the PITP Act, the tax benefit provided by LMITO is currently:

• individuals earning up to $37,000 are entitled to a LMITO amount of $200 per annum
• individuals earning more than $37,000 but less than $48,000 are entitled to a LMITO amount of $200 plus three cents for every dollar in taxable income above $37,000, up to a maximum rate of $530
• individuals with taxable income between $48,000 and $90,000 receive the maximum value of LMITO of $530 and
• individuals earning more than $90,000 have their LMITO amount reduced by 1.5 cents for every dollar in taxable income above $90,000, until it phases out entirely for incomes of $125,333 and above.

In addition to introducing the LMITO, the PITP Act also raised the taxable income threshold for the 32.5 per cent marginal tax rate from $87,000 to $90,000 from 1 July 2018.

Stage one of the Bill seeks to increase the LMITO. If passed, the Bill would:

• Increase, the LMITO to $255 per annum for those with a taxable income of $37,000 or less.
• Between taxable incomes of $37,000 and $48,000, the value of the offset will increase at a rate of 7.5 cents per dollar to the maximum offset of $1,080.
• Taxpayers with taxable incomes between $48,000 and $90,000 will be eligible for the maximum offset of $1,080.
• For taxable incomes of $90,000 to $126,000 the offset will phase out at a rate of three cents in the dollar.
  • The LMITO is temporary and will apply for the 2018–19, 2019–20, 2020–21 and 2021–22 income years. Further tax reductions and increases to LITO commencing from 1 July 2022 will compensate for the cessation of the LMITO.

Table 1 summarises the LMITO as implemented by the PITP Act and the changes proposed by the Bill, by taxable income range.

Table 1: summary of changes to LMITO from 1 July 2018

Source: Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 and Treasury Laws Amendment (Personal Income Tax Plan) Act 2018.

Amount of tax reduction (stage one)

The tax reduction in stage one for individuals at different taxable income levels is illustrated by figure 1. Figure 1 shows the tax reduction provided by the PITP Act and the total tax reduction that would apply if the Bill is passed (compared to tax rates and offsets that applied in the 2017–18 income year, prior to the implementation of the PITP Act).

As figure 1 shows, the tax cuts in stage one are targeted more heavily towards lower and middle income earners—those earning less than $125,000 in taxable income.

Figure 1: tax reduction ($ per annum) from stage one of the tax plan

Source: Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 and Treasury Laws Amendment (Personal Income Tax Plan) Act 2018.

Stage two: commencing in the 2022–23 income year

The PITP Act legislated changes to tax rates and thresholds and to the LITO commencing from the 2022–23 income year. The Bill proposes further tax reductions, building on those implemented through the PITP Act.

Income tax rates and thresholds

Under the changes already implemented by the PITP Act the upper threshold for the 32.5 per cent marginal tax rate will increase from $90,000 to $120,000 and the upper threshold for the
19 per cent rate will increase from $37,000 to $41,000 from 1 July 2022.

The Bill would further increase the upper threshold for the 19 per cent marginal tax rate from $41,000 to $45,000 from 1 July 2022.

LITO

Under the changes already implemented by the PITP Act commencing from 1 July 2022, the LITO will increase from $445 to $645 per year for individuals with taxable income less than $37,000 (phasing out for taxable incomes greater than $66,667).

The changes proposed by the Bill would increase the maximum amount of LITO to $700 for individuals with taxable income less than $37,500. The LITO will then phase out in accordance with the following schedule:

• individuals earning between $37,500 and $45,000 will have the new LITO amount reduced by five cents in the dollar for each dollar of income above $37,500 until their income reaches $45,000 and
• individuals earning over $45,000 will have their LITO amount reduced by 1.5 cents in the dollar until it phases out entirely for individuals earning more than $66,667.

LMITO

LMITO will cease to apply from 1 July 2022 but the increase in the LITO and the changes to income tax rates and thresholds would deliver a tax cut commensurate with, or greater than, the tax reduction provided by LMITO.

Summary of changes

The changes implemented by the PITP Act and proposed in the Bill are summarised in table 2.

Table 2: summary of legislated and proposed tax plans for 2022–23 and 2023–24

Source: Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 and Treasury Laws Amendment (Personal Income Tax Plan) Act 2018.

Amount of tax reduction (stage two)

The total tax reduction in stage two for individuals at different taxable income levels is illustrated by figure 2. Figure 2 shows the tax reduction provided by the legislated PITP and the total tax reduction that would apply if the Bill is passed (compared to tax rates and offsets that applied in the 2017–18 income year, prior to the implementation of the PITP Act). Stage two provides relatively larger tax cuts to higher income earners, up to a maximum of $2,565 per annum (for those with taxable incomes greater than $120,000).

Figure 2: tax reduction ($ per annum) from stage two of the tax plan

Source: Parliamentary Library analysis based on the Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 and Treasury Laws Amendment (Personal Income Tax Plan) Act 2018.

Stage three: commencing in the 2024–25 income year

The changes proposed in stage three, commencing from 1 July 2024, are entirely delivered through changes in personal income tax rates and thresholds.

The PITP Act abolishes the 37 per cent marginal tax rate entirely from 1 July 2024 and extends the marginal tax rate of 32.5 per cent to all taxable incomes up to $200,000.

The Bill proposes to further reduce the 32.5 per cent rate to 30 per cent. This will mean that all taxpayers with a taxable income between $45,000 and $200,000 will pay a marginal tax rate of 30 per cent.

Table 3: summary of legislated and proposed tax plans for 2024–25 and later income years

Source: Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 and Treasury Laws Amendment (Personal Income Tax Plan) Act 2018.

Amount of tax reduction (stage three)

The total tax reduction in stage three for individuals at different taxable income levels is illustrated by figure 3. Figure 3 shows the tax reduction provided by the PITP Act and the total tax reduction that would apply if the Bill is passed (compared to tax rates and offsets that applied in the 2017–18 income year). Stage three provides relatively larger tax cuts to higher income earners, up to a maximum of $11,640 per annum (for those with taxable incomes greater than $200,000).

Figure 3: tax reduction ($ per annum) from stage three of the tax plan

Source: Parliamentary Library analysis based on the Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 and Treasury Laws Amendment (Personal Income Tax Plan) Act 2018.

Financial implications

According to the Explanatory Memorandum to the Bill the PITP is estimated to reduce revenue by $19.5 billion over the budget forward estimates period and by $158 billion over the period to 2029–30.[2] A break-down of this estimate over each year of the forward estimates period is included in Table 4.

Table 4: financial impact of the PITP (forward estimates period) ($m)

Source: Explanatory Memorandum to the Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019, p. 3.

The Bill is expected to have a more significant negative financial impact beyond the forward estimates period as the third step of tax changes under the Bill commences in 2024–25.

Estimates of the cost of each step of the proposed changes over ten years were published by the Parliamentary Budget Office (PBO) on 28 June 2019 in response to a request by Senator Richard Di Natale. These figures show that:

• stage one is expected to reduce Commonwealth revenue by $14.9 billion over the period to 2029–30
• stage two is expected to reduce Commonwealth revenue by $47.6 billion over the period to 2029–30 and
• stage three is expected to reduce Commonwealth revenue by $95.4 billion over the period to 2029‑30.[3]

Distribution of the tax cuts

The tax reductions implemented through the PITP and proposed by the Bill initially target those on low and middle taxable incomes, with step two and step three providing additional tax reductions for those at higher taxable income levels.

Table 5 shows the estimated tax reduction for selected taxable incomes from each stage of the already implemented PITP and the additional tax cuts under this Bill. The highest tax cut currently available under the legislated PITP is $7,225 per annum. The highest tax cut available under the Bill would be $11,640 per annum for those with taxable income over $200,000 from 2024–25 onwards.

Table 5: tax reduction ($ per annum) under the legislated and proposed tax plans (by taxable income) – single resident tax payer

Source: Parliamentary library analysis based on the Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 and Treasury Laws Amendment (Personal Income Tax Plan) Act 2018.

Policy position of non-government parties/independents

Australian Labor Party

The Australian Labor Party has indicated support for stage 1 and stage 2 of the Bill (but not stage 3) and argued that some of the tax changes made by the Bill should be brought forward to 2019 to provide additional economic stimulus.[4]

The Shadow Treasurer moved two amendments to the Bill in the House of Representatives on 2 July 2019:

• The first set of amendments [sheet 1], would bring forward some of the already legislated reductions in personal income tax rates from the 2022–23 income year to the 2019–20 income year. The proposed amendments would increase the income threshold for the 32.5 per cent marginal rate from $90,000 to $120,000.[5]
• The second set of amendments would have effectively removed the third stage of changes in the Bill, so that the marginal tax rate applying for taxable incomes between $45,000 and $200,000 would remain at 32.5 per cent.[6]

Australian Greens

The Australian Greens do not support the Bill, arguing that there are better ways to provide support to low and middle income earners than tax cuts.[7]

Key provisions

Schedule 1 – Low and Middle Income Tax Offset and Low Income Tax Offset

Schedule 1 of the Bill proposes changes to the ITAA97 to implement increases in the LMITO for the 2018–19, 2019–20, 2020–21 and 2021–22 income years, and increases to the LITO for the 2022–23 income year onwards.

• Item 2 of Schedule 1 of the Bill repeals the existing rates for the LMITO at subsection 61-107(1) of the ITAA97 and inserts the proposed higher rates of LMITO.
• Item 3 of Schedule 1 of the Bill repeals the existing rates for the LITO at subsection 61-115(1) of the ITAA97 and inserts the proposed higher rates of LITO.

Schedule 2 – Personal income tax reform

Schedule 2 of the Bill proposes changes to the Rates Act to implement changes to personal income tax rates and thresholds.

• Item 1 of Schedule 2 of the Bill implements the new income tax rates and thresholds that apply to resident individuals in 2022–23 and 2023–24.
• Item 2 of Schedule 2 of the Bill implements the new income tax rates and thresholds that apply to resident individuals in 2024–25.
• Item 3 of Schedule 2 of the Bill implements the new income tax rates and thresholds that apply to working holiday makers in 2022–23.
• Item 4 of Schedule 2 of the Bill implements the new income tax rates and thresholds that apply to working holiday makers in 2024–25.